Market Price of Bond and Interest Rate

Market Price of Bond and Interest Rate

Market price of bond and interest rate has inverse relationship i.e. increase in interest result would decrease market price, while an decrease in interest rate would increase market price, this has been explained below.

1.    Increase in Market Price of Bond

Market price of bond is increase with decrease in interest rate. It is very logical a bond issued @ 10%, if the current interest rate falls to 8%, it means that already issued bond is offering high rate of interest, therefore market price of bond increases.

2.    Decrease in Market Price of Bond

Market price of bond falls with increase in interest rate. This is very much expected result, because if current interest rate increases, it means current securities are offering higher rate than bond issued earlier, therefore market price of bond is expected to fall.